Main principle of this report is to analysis the Operation of Leasing in Bangladesh, here focus on Prime Finance and Investment Limited. Other objectives are identify the major lease loan providers in the market and analyze their offers to the clients and compare the performances of the current lease loan providers. Report also focus on identify the different processes of appraising a prospective client by the financial institutions. Finally find out market potential for lease loan products and to prepare a guideline for PFI in terms of lease loan offering, process and marketing.

Introduction

Leasing business is gaining increased importance in the economy of Bangladesh with its gradual transformation from an agrarian to industrial one. The government periodically revises the trade and industrial policy to create a liberal business environment both for domestic and foreign investment. Increased investment in the energy sector as well as in power, transport, telecommunications, water and sanitation, and safe disposal of wastes is expected to bring further opportunities for leasing industries.

Lease financing was first introduced in Bangladesh in the early 1980s. Industrial Development Leasing Company of Bangladesh Ltd. (idlc), the first leasing company of the country, was established in 1986 under the regulatory framework of Bangladesh Bank. It was a joint venture of the Industrial Promotion and Development Company of Bangladesh Ltd. (ipdc), International Finance Corporation, and Korea Development Leasing Corporation. Another leasing firm, the united leasing company Ltd. started its operations in 1989. The leasing business became competitive with the increase in the number of companies and wider distribution of their market share.

Commercial banks and development finance institutions (DFIs) have been the traditional lending institutions in Bangladesh. In fact, the concept of lease financing is a relatively new one in the country. Initially, leasing companies had to adopt the role of educators to make Bangladeshi entrepreneurs aware of the benefits of leasing. However, as DFIs demonstrated poor recovery and fund recycling performances, leasing got the opportunity to develop as an alternative source of funding. A few other factors also contributed to development of the leasing business in the country. For example, the commercial banks have been keener in providing trade financing and Foreign Exchange dealings rather than long-term loans because of the risks involved and their longer gestation period. The selection of lease proposals is relatively free from extraneous pressure and is subject to a quality level appraisal. Under lease agreements in the private sector, projects are sanctioned and implemented expeditiously, resulting in benefits in time and cost savings. Private leasing companies also attract clients by providing relatively better services. The down payments in leasing are not high and the gestation period is low. Also, in case of lease financing, incidental costs incurred in the process of import clearing, installation, and commercial production are capitalized, which substantially reduce the initial investment.

Leasing companies, however, face some problems in conducting their business in the country. The relatively slow growth of the demand side compared to the fast growth of the lease business is one such problem. This leads many leasing companies to operate in partial capacity. The culture of loan default that prevails in the country is also a deterrent. Leasing companies often find it difficult to raise funds through short- or long-term borrowing from money and capital markets. They are hard pressed to deal with the financial assets because of the present laws of the country, which are also not fully enforceable.

Origin of the Report

This report is written as a fulfillment of the internship Program of MBA degree by Mohammad Fuad Shahariar, Roll # 663, 5th Batch MBA Program for Chairman, Internship and Placement Committee, Faculty of Business Administration, University of Dhaka.

Objectives

To develop a clear idea about the leasing sector in Bangladesh.

To get a thorough know-how about lease loan financing in Bangladesh.

To identify the major lease loan providers in the market and analyze their offers to the clients.

To compare the performances of the current lease loan providers.

To recognize the customers’ perspective of the story – what criteria they look into before choosing a financier.

To identify the different processes of appraising a prospective client by the financial institutions.

To find out market potential for lease loan products.

To prepare a guideline for PFI in terms of lease loan offering, process and marketing.

Concept and Definition of Lease

Lease is a contract between the owner and the user of assets for a certain time period during which the second party uses an asset in exchange of making periodic rental payments to the first party without purchasing it. Under lease financing, the lessee regularly pays the fixed lease rent over a period of time at the beginning or at the end of a month, 3 months, 6 months or a year. At the end of the lease contract the asset reverts to the real owner.

However, in case of long-term lease contracts, the lessee is generally given the option to buy the leased asset or renew the lease contract. The three major types of leases are the operating lease, financial/capital lease and the direct financing lease. The operating lease is a short-term lease contract where the lessor bears all operating and repairing costs of the asset and the lessee pays periodic rental payments to the lessor, and where the lease is cancelable, and there is no bargain purchase option. Financial/capital lease is a long-term lease contract where the lessee bears all operating, repairing and maintenance costs, and makes periodic rental payments to the lessor. The lease is not cancelable and the lessee has the option for bargain purchase or renewal of lease contract at the end of the original lease period. In a direct financing lease, the lessor leases the asset by manufacturing or by purchasing from the manufacturer to the lessee directly and the lessee makes regular rental payments to the lessor. The lessor holds the ownership of the asset until the end of the lease period and the lessee holds the possession of the asset. In addition to these major types, there are some other types of lease such as sale and lease and leveraged lease.

Legally, others define a leasing company as one having the business of hiring plants or equipment or of financing their hire. The International Finance Corporation promotes leasing as a method of financing industrial development in the developing countries as a part of its Capital Market development strategies.

A “financial lease” is defined as a transaction in which the lessor purchases leased property selected by the lessee; the lessee has the right to possession and use of the leased property in exchange for payment of rent; and upon expiration of the lease, the lessee may renew the lease, exercise an option to buy the leased property or return it to the lessor. Or

“An agreement where the leaser receives lease payments to cover its ownership cost. The lessee is responsible for maintenance, insurance, and taxes. Some finance leases are conditional sales or hire purchase agreements”.

Researchers have examined the features of leasing from economic, legal, fiscal and accounting angles. While no universally accepted definition can be said to have evolved, various bodies have formulated their own definition of the word. The European Leasing Association, the association of leasing companies in Europe, defines leasing as:

“A contract between a lessor and a lessee, for the hire of a specific asset, selected from a manufacturer or vendor of such asset by the lessee. The lessee has possession and use of the asset on payment of specified rentals over a period.”

Legally, others define a leasing company as one, having the business of hiring plants or equipment or of financing their hire. The International Finance Corporation promotes leasing as a method of financing industrial development in the developing countries as a part of its Capital Market development strategies.

Under lease financing, the lessee regularly pays the fixed lease rent over a period of time at the beginning or at the end of a month, 3 months, 6 months or a year. At the end of the lease contract the asset reverts to the real owner. However, in case of long-term lease contracts, the lessee is generally given the option to buy the leased asset or renew the lease contract.

Where as Leasing, one of the financing techniques, allows a company to use some of its operating fixed assets (i.e. buildings, plant and other fixed assets) under a rental system. In certain cases, the company may purchase the asset at the end of the contract for a pre-determined and usually very low amount. A leasing transaction is called a lease.

In accordance with the Law, financial leasing is a form of investment activity, in which a lessor is obligated to transfer a leased asset acquired from a supplier, held in ownership by the lessor, and agreed upon with the lessee, to a lessee for an agreed upon fee and terms for temporary use and possession for commercial purposes for a period of no less than three years. The transfer of the lease asset in the lease agreement must meet at least one of these \ following conditions:

The transfer of the leased asset to the lessee’s ownership and/or the lessee’s right to acquire the leased asset at a fixed price are stipulated by the lease agreement;

The term of the lease agreement shall exceed 75% of the useful life of the leased asset;

The current (discounted) amount of the lease payments over the length of the lease agreement shall exceed 90% of the price of the transferred leased asset.

Legal Framework for Leasing

The leased asset may be any non-consumable good, including companies, property complexes, building and structures, equipment, transportation, land, and other movable and unmovable property. Leased assets cannot be natural resources, and property barred or restricted from general public circulation.

The parties to a lease (lessor, lessee, and supplier) may be any legal entity or physical person:

Physical persons operating as lessors or lessees must have the status of a certified sole proprietor; and,

Suppliers may be any physical person.

Subleasing

Subleasing is a form of subhire of the leased asset in which:

The lessee has the right, with written permission of the lessor, to sublease the leased asset, received through a lease agreement, to a third party for the temporary possession and usage on the basis of a sublease;

The sub lessor and the sub lessee act in this relationship as the lessor and the lessee, and have the same rights and obligations accorded in the civil legislation for these parties to the lease;

The period of the sublease cannot be longer than the original lease agreement; and,

If the original lease agreement is terminated, the sublease agreement is automatically terminated, if this point is not otherwise addressed in the lease agreement.

Rights and Obligations of the Parties to a Lease

Leasing legislations throughout the region create a clear balance of rights and obligations for each party to the lease, equally defending the interests of each party. A progressive aspect of the legislation is that the norms in the legislation are based on imperative law, which means that even though the legislation contains concrete principles of behavior that must be observed; at the same time, the parties to the lease also must have the right to decide upon the extent of their rights and obligations, observing the concept of freedom of contract.

The lessor is not accountable to the lessee for the non-fulfillment of the sale-purchase contract, except for those cases in which the selection of the supplier and the leased asset was conducted by the lessor, as well as in cases when non-fulfillment of the sale-purchase contact was the result of the wrongful acts (omissions) of the lessor.

The lessee has the right to address all the claims which stem from the sale-purchase contract directly to the supplier even though the lessee is not the party to that contract. As a result, the legislation imposes an obligation on the lessor to notify the Supplier about the purpose of purchasing an asset for lease.

Insurance

Insurance of the leased asset against all potential detriments attributed to the risk of incidental loss, deprivation, larceny, damage or premature wear and tear is voluntary and is decided through agreement of the parties. Agreement on insurance can take the following terms:

Which party to the lessee will be the insurer, and who will pay for the insurance premiums:

Will the insurance premiums compensate which party?

Which insurance company will be used and who will select the insurance company?

Who will receive compensation from the insurance company, and how will this compensation be used?

Secondary Leasing

The Law on Financial Leasing has introduced the concept of a secondary lease or a secondary transfer of the leased asset to another lessee following the end or termination of the initial lease agreement.

In this way, the law allows for the return of the leased asset to the lessor, and in the case of repossession following default, the subsequent transfer of the returned leased asset to a new lessee.

The law furthermore states that in the case of secondary leasing , the lessor is obligated to inform the supplier in written form that the leased asset has been transferred to a new lessee for use and possession within one month after the transfer. In the case of a secondary lease, the lessor is considered the party, which selected the supplier and the leased asset.

Lease Payments

The law defines lease payments as periodic payments that include the total amount of the payments stipulated in the lease agreement over the entire period of the agreement. Lease payments must be calculated subject to full or partial repayment of the cost of the leased asset, based on its value at the moment of lease agreement execution. The lease payments must be paid during the term of the lease agreement and include:

Reimbursement to the lessor for expenses incurred through the acquisition of the leased asset and other expenses affiliated with the acquisition, delivery, and installation of the leased asset for its use as defined in the lease agreement; and,

Fees for the provision of the lease.

Repossession of the Leased Asset

Interviews with lessors indicated that repossession of leased assets through the court system has operated fairly efficiently. However, court decisions are not always provided in a desirable time length that meet the needs of the lessor as inactive leased assets and unpaid lease payments could quickly result in losses to the lessor. For this reason, Kazakhstan has also implemented non-court mechanisms to repossess the leased asset.

The Law on Financial Leasing allows for the right of non-disputed repossession of the leased asset on the basis of court order for use in those cases in which the lessee admits fault but does not return the leased asset.

To take advantage of the court order proceedings, the lessor must officially submit a claim to the court, which within three days issues a court order, a copy of which is sent to the lessee. The lessee has the right within 10 days to submit its objections to the court. If the lessee files an objection, the court must cancel the court order as the court order proceedings can only be used on the basis of non-disputed demands.

If within the 10-day period, the lessee does not submit any objections, the court order is executed and enforced in the manner prescribed, and the lessor can repossess the leased asset based upon the court order.

This repossession procedure provides the lessor an alternative and more effective method to defends its interests.

Term Uses in Leasing

Lessor

The lessor’s business license must have a scope of business that includes financial leasing operations.

Lessee

The “lessee” is defined as any natural person or enterprise/company that enters into a financial leasing contract with the lessor to obtain funds to finance the acquisition of the leased property, and to obtain the right of possession and usage by paying the rent on the agreed terms.

Leased Property

The “leased property” is defined as any real property and movable durable property (including the accessory technologies), other than natural resources. Examples include (i) equipment, machinery and instruments; and (ii) vehicle, vessels, aircraft and space shuttles. The Outline does not distinguish between commercial and consumer leases, although other consumer protection laws are also under consideration. These laws could affect financial leases with consumers.

Registration of Leased Property

Leased property (other than real property, aircraft, vessels and motor vehicles) must be registered at the State Administration of Industry and Commerce, the government authority in charge of registration of mortgage or security interests of movable assets, or with any industry association authorized thereby. Such registration is needed to protect the parties’ interests against bona fide purchasers or creditors.

Nature of the Rights to Leased Property

The financially leased property is excluded from the bankruptcy estate of the lessee. If the lessee fails or delays in making a rental payment, the lessor may terminate the contract and repossess the leased property.

Term

In general, the financial lease term should be shorter than the permissible period for depreciation for the leased property, but in no event less than 20% of the depreciation period.

Rent

The financial lease rent shall be determined by the cost of the leased property, plus the reasonable profit of the lessor, unless otherwise agreed by the parties.

Acceleration and Repossession

If the cumulative past-due rent is more than one-fifth of the rent under the financial lease or the number of defaults in making the rental payments exceeds one-fifth of the total number of the rental payments, the lessor may demand immediate payment of all the rental payments or terminate the financial lease repossess the leased property and recover damages including expenses. However, the total amount of the compensation cannot exceed one-fifth of the total rent under the financial lease .The lessee may not prevent the lessor from exercising its right of repossession or resist the lessor in this regard.

Risk Assumption

When the lessee possesses the leased property, unless otherwise agreed upon by the parties, any damages, losses and risks to the leased property shall be the sole responsibility of the lessee.

Functions Of Leasing Companies:

The functions of a lease business include lease financing, short-term financing, house building financing, and merchant banking and corporate financing. In this last group of functions, the leasing business in Bangladesh moved away from regular leasing activities and is now involved in stock-market related activities such as issue management, underwriting, trust management, private placement, portfolio management, and mutual fund operation. Broad capital market operations of the lease financing institutions include bridge financing, corporate counseling, mergers and acquisition, capital restructuring, financial engineering, and lease syndication. Prominent among the sectors of the economy that now receive lease financing services are textiles, apparels and accessories, transport, construction and engineering, paper and printing, pharmaceuticals, food and beverage, chemicals, agro-based industries, telecommunications, and leather and leather products.

Lease Financing,

Short-term Financing,

House building financing,

Merchant Banking

Corporate Financing.

Issue Management

Underwriting

Trust Management.

Private Placement

Portfolio Management.

Mutual Fund Operation.

Bridge Financing,

Corporate Counseling

Mergers and Acquisition,

Capital Restructuring,

Financial Engineering,

Lease Syndication.

The Benefit of Leasing

Leasing conserves capital

We live in a world where demands on working capital always seem to exceed supply. By providing 100% financing, leasing allows your customer to have more money available to put into profit-generating activities.

Leasing provides tax-timing advantages

Lease payments are normally treated as a fully deductible operating expense for tax purposes. In addition, since the lease term is often shorter than the depreciable life for tax purposes, a lease can enable your customer to expense the equipment more rapidly than a purchase.

Leasing provides an alternate source of credit

Leasing provides your customers with an additional source of financing. Unlike most bank loans, which require 20% to 30% down, leasing offers, financing for 100% of the equipment cost. Furthermore, leasing does not impact a customer’s bank line of credit – the existing line remains intact for essential short-term needs.

Leasing means equipment flexibility

As their businesses grow and change, customers may need more equipment or equipment with increased capabilities or additional accessories. Leasing allows customers to add to or trade up their equipment at any point during the lease term.

Leasing lessens the impact of inflation

Inflation is a fact of life; every year the purchasing power of the dollar declines in value. By leasing, customers get the equipment they need at today’s prices and pay for it with tomorrow’s cheaper dollars.

Lease payments are fixed payments

Since lease payments are fixed, leasing lets your customer plan ahead with the assurance that his monthly payments will not change. With revolving bank loans, payments can change depending upon credit strength and / or prevailing interest rates.

Interest rate is higher than it would be for a purchase loan. Delinquent charge increases the cost of lease.

Ownership flexibility:

In opting for a lease, the lessee may sometimes invite restrictions on equipment use, insurance covenants, etc.

Ineligibility of certain incentives:

Certain grants and incentives are available to owners of assets who themselves use the assets. By setting up a lease arrangement, such benefits are sometimes lost by both the lessor and the lessee.

Taxation:

In a case where the lessee has adequate tax capacity to utilize the tax benefit, long-term leases may sometimes prove inefficient.

Under statement of assets:

Leasing leads to an effective under statement of a lessee’s assets and leads to an under valuation of the firm.

Industrial Development Leasing Company (IDLC)

Industrial Development Leasing company (IDLC) is a multi-national joint venture public limited company and the first leasing and multi-product Non-Bank Financial Institution in Bangladesh. Foreign sponsors hold 45% of the company’s shares

The company commenced leasing business on 22 February 1986. It became a listed company in the Dhaka Stock Exchange on 20 March 1993 and in the Chittagong Stock Exchange on 25 November 1996. IDLC started to accept deposits after receiving the license from Bangladesh on 10 September 1994. On 7 February 1995, Bangladesh Bank gave it the license to operate as non-bank financial institution under the Financial Institution Act 1993.

IDLC has a significant contribution to capital asset financing to private sector industries in Bangladesh. Its business focus in the early years was in the area of 3-5 years term financial leasing with particular emphasis on balancing, modernization, replacement and expansion of existing units. Driven by the demand for funds from different classes of people and the competition with other similar institutions, IDLC diversified its functional areas into other financial services including short-term finance, corporate finance and merchant banking activities.

United Leasing Company (ULC)

a second leasing company, United Leasing Company (ULC) was established in 1989 with participation of Asian Development Bank(ADB), Commonwealth Development Bank (CDC) and the Lawrie Group PLC of UK. It was incorporated on 27 April 1989 as a public limited company

ULC was set up with the objective of introducing a new instrument of finance to assist mainly the private sector industries. The paid up capital of the company is 70 million Taka out of which foreign and domestic sponsors held 40.29% and 33.57% respectively and the remaining 26.14% was held by institutional shareholders (19.46%) and the general public (6.68%).

Phoenix Leasing Company Ltd.

Phoenix Leasing Company Limited incorporated in Bangladesh on 19 April 1995 as a public limited company under the Companies Act 1994 with registered office at Dhaka. The company obtained license as a Non-bank Financial Institution on 9 May 1995 under Section 4(1) of the Financial Institutions Act 1993

The company provides lease financing for various types of machinery and equipment including vehicles for industrial, commercial and agricultural purposes. It invests in sectors such as transport, electric and electronic goods, leather, textile, printing, marine vehicles and equipment, steel and engineering, fishing boats and trawlers, medical equipment and small-scale industries. The company first purchases a property in its own name and pays the total price to its supplier. After accumulating and adding all other relevant/incidental costs with the original purchase price, it determines the lease price of the property and then signs lease contracts with the lessee for a period of two to five years.

Lease contracts require security or collateral from the lessee in various forms and lease installments are determined on the basis of price of the properties to be leased and other relevant factors. On the expiry of the lease periods/contracts, the lessee can gain the ownership of the leased property/equipment upon payment of 5% of transfer value of the equipment as salvage value of that property. Alternatively, the ownership and physical possession of the property goes back to the lessor.

International Leasing and Financial Services Limited (ILFSL)

International Leasing and Financial Services Limited (ILFSL) a jointly owned equipment leasing and financial services company incorporated in Bangladesh on 15 January 1996 as a public limited company under the Companies Act. It obtained license from Bangladesh Bank on 19 February 1996 and commenced business on 24 March 1996. The company was established with an authorised and paid up capital of Tk 300 million and Tk 60 million respectively.

The clients established the company to carry out the business of leasing all kinds of industrial, agricultural, commercial, scientific, electrical and electronic equipment and machinery, and vehicles for all possible uses. It also provides other financial services including long-term loans to customers of selected groups. It was recently allowed to participate in merchant banking activities ie, to act as issue manager and underwriter of public issues of shares and debentures.

A 7-member board of directors manages the company. The managing director is the chief executive of the company. In 2000, the company had a total of 21 employees including 13 executives.

Bay Leasing and Investment Ltd.

Bay leasing and Investment Ltd. is locally owned company. The major shareholder of the company is Mr. Motlub Ahmed, who holds 50% of the company share. Several individuals own the other shares. It went into operation in May 1996. The company’s initial target is to finance prospective clients only on transport sectors like bus, trucks etc. They have made an arrangement with Nitol Motors for financing bus and truck that Nitol supplies. The paid up capital of the company is 25 million taka.

Bangladesh Leasing Finance Company Ltd.

Bangladesh Leasing Finance Company Ltd is another joint venture leasing company, which haven’t started their operation. The major shareholders of the company are Pakistan Industrial Leasing Corporation Limited (30%), Netherlands development Finance Company (20%), M. M. Ispahani Limited (25%), Green Delta Insurance Company (12. 5%) and Delta Life Insurance Company Ltd (12.5%). The company’s paid up capital is 150 million.

Infrastructure Development Company Limited

(IDCOL) a Non-Bank Financial Institution established in Bangladesh in 1997 as a government owned public limited company to promote participation of the private sector in investment in infrastructure facilities and in operation, ownership and maintenance of them. On 30 June 2001, the authorized and paid up capital of the company was Tk 100 million.

IDCOL provides long-term senior and subordinate debt financing for viable infrastructure projects in the private sector. The company finances projects of power generation, telecommunication, urban environmental services, gas and gas related infrastructure, ports, toll roads, water supply, and other infrastructure development. The company has a preference for build-own-operate and build-operate-transfer type of projects. It finances up to 40% of the total project costs and to be eligible for its funding support, the project must meet the government’s priority criteria.

The company is managed by a 7-member board of directors appointed by the government from amongst senior government officials and prominent entrepreneurs. A team of project-finance advisors of international repute assists the board. An 11-member management team assists the chief executive officer (CEO) of the company in carrying out its day-to-day business.

Peoples Leasing and Financial Services Limited (PLFSL)

It is a leasing and financing company registered in Bangladesh as a public limited company under the Company Act and as a Non-bank Financial Institution under the Financial Institutions Act 1993 with license from the Bangladesh Bank to transact all kinds of leasing and financing businesses.

The company assists industrial and other productive sectors through investment in sustainable projects in the form of lease and other long-term finance. It participates in the Capital Market by investing in shares and debentures, acting as issue, fund and portfolio manager, providing bridge and syndicated loans, and underwriting public issue of shares and debentures. Corporate finance and consumers’ credit financing are also included in the functions of the company.

The company provides lease financing for machinery and equipment of large and medium scale industries, marine vessels and equipment, generators and boilers, lifts/elevators, ice plants, air conditioners, vehicles of all types for use in industrial or commercial purposes, medical instruments, light and heavy agricultural equipment, computer hardware and software, and some durable consumer items.

Activities of Leasing in Bangladesh

Leasing in Bangladesh, like in many of its peer countries, owes its origin to the efforts of the International Finance Corporation (IFC), Washington. At the instance of IFC, the first Leasing Company in Bangladesh, Industrial Development Leasing Company of Bangladesh Ltd. (IDLC) was set up in 1984 and commenced its operations in 1986, with a 20% shareholding from Korea Development Leasing Corporation.

For several years, IDLC remained the sole leasing company in Bangladesh. However, the real momentum began in the 1990s. The country’s central bank, Bangladesh Bank, put in place a regulatory mechanism under the Financial Institutions Act 1993 and the Financial Institutions Regulations 1994.

In 1997, there were 15 leasing companies in the country. Besides, some of the banks and financial institutions also added leasing divisions to their existing operations.

Licensing and regulation:

Who or what is a leasing company?

Leasing in Bangladesh is a “financial business” and cannot be carried on except in terms of a license granted by Bangladesh Bank.

Sec. 4 of the Financial Institutions Act prohibits any person or institution from carrying any “financial business” in Bangladesh except in accordance with a license granted by the Bank.

Sec. 2 (1) defines “financial business” as the business carried on by a financial institution. “Financial institution” as defined in sec. 2 (2) includes a leasing company.

“Leasing company” is defined in sec. 2 (17) of the Act as a company, which carries on as its business or part of its business hiring of plant or equipment, or the financing of such hiring business.

A first look at the definition suggests that even if a company, otherwise engaged in a manufacturing or non-financial activity, carries on a leasing activity as a part of its business, such company would be treated as a “financial institution” under the Act. This, however, could not be intent of the lawmaker as demonstrated later. The use of the words “part of its business” in sec. 2 (17), not found in definitions of other varieties of financial institutions in the Act, seems to be a surpluses and cannot lead to a technical extension whereby even a single lease transaction by a non-leasing company would bring such company under the fold of the Act.

The central definition in the Act is the definition of “financial institution” in sec. 2 (2). It is defined as “such non-banking financial institution, which is engaged in…..”. Apparently, what sec. 2 (2) enumerates are categories of financial activities such as lending or giving of advances, merchant banking, venture capital, leasing, Investment Company, etc. The definition is not divested of the element of principality of such business in order to characterize a company as a financial institution. For example, giving of loans or advances is a financial business. But that cannot be taken to mean that a manufacturing company, which in case of a short-term surplus in its business, grants a loan to someone, will be treated as a “financial institution”. In other words, the principal business of an entity should be one of the several financial businesses listed in sec. 2 (2).

This would mean that the ban under sec. 4 of the Act on carrying any “financial business” should be understood as a ban on carrying such business as a principal business. Such an understanding is very important, since there are ample opportunities to extend leasing activities to non-leasing or unlicensed entities as follows:

In many markets, leasing has flourished because of its tax appeal: leasing has been organized for high-net worth individuals to shelter against their taxes. That is, a high net worth individual may do one lease transaction, not as his principal business, and shelter his taxes. In many cases, an individual may participate in a lease syndicate organized by a leasing company.

Restricting leasing to only leasing companies would eliminate any possibility of leasing activities being carried, on a one-off basis, by manufacturing or non-financial companies. This is a common practice in many countries. A non-leasing company, say a hotel, would carry one lease transaction and shelter against its taxes.

As leasing markets develop, leasing by vendors or manufacturers would become common. That is, the manufacturer of capital goods will be prepared to provide his own product on lease, instead of selling it directly. Obviously, such manufacturer cannot be treated as a “financial institution.”

Securitisation of lease receivables is a very important development in leasing markets. In strict sense, securitisation means participation in leasing transaction by the participants in the securitised portfolio. A literal ban on “financing of a leasing transaction” would inherently imply a ban on participation in a securitised portfolio as well.

Restrictions on leasing companies

Having put leasing companies at par with other non-banking financial institutions, the Act puts the following principal restrictions on leasing companies:

Corporate form:

Apparent from the definition of sec. 2 (17) is the intent that only corporate bodies should be allowed to engage in leasing business.

What can leasing companies do?

There are no restrictions in the Act in leasing Companies undertaking non-leasing activities. Apparently, leasing companies can engage themselves in other financial businesses, principally hire purchase. Most leasing companies in Bangladesh currently do not take up hire-purchase or long-term corporate lending activities, though they do have exposures in money markets such as bills discounting, short-term deposits etc.

There is a bar in sec. 15 in leasing companies taking up any non-financial business such as import, export, retail or wholesale business.

Hire purchase, it may be noted, is clearly covered by sec. 2 (2) (c) of the Act.

Minimum capital, branching, etc

The Act empowers the Bank to fix minimum capital for leasing companies. Opening of offices and branches is also regulated.

Restrictions on declaration of dividend

Sec. 10 prohibits a financial institution from declaring any dividends without fully writing off all direct and administrative expenses, share issue expenses, brokerage, losses, and other capitalized expenses.

Exposure restrictions

Very important restrictions are contained in sec. 14 on exposure by leasing companies. These restrictions are:

Not accept any deposit which is withdraw able by cheque, draft or order of the depositor; in other words, not to accept any call deposits;

Not deal in gold or any foreign exchange;

Not to expose more than 30% of its capital in a single individual, firm, body corporate or companies controlled by such individual;

Not to provide any unsecured loan facility exceeding Tk 5 lacs to any person; it may be noted that in the language of the Act, a lease transaction will be treated as a secured financing since the lessor retains title over the asset, etc.

Not to acquire immovable properties exceeding 25% of its paid-up capital and reserves.

Each company every year shall transfer at least 20% of its divisible profits to a reserve fund, unless the aggregate of its share premium along with such fund is equal to or more than the paid up capital of such company.

Leasing law in Bangladesh

Leasing is an asset renting activity, and is therefore, governed by common law. The Contracts Act 1872 applies to contracts of leases. Sections 148 to 171 of the Contracts Act cover provisions relating to bailment.

As these provisions are identical to those applicable under English law, the chapter devoted to general law of leasing adequately covers the law in Bangladesh as well.

It may be noted that the general law of contracts is limited to bailments of “goods”. “Goods” include movable property only – immovable property is not covered by common law. As it the common feature of all Anglo-Saxon legal systems, transactions in immovable properties are covered by a separate system of laws.

Taxation of leases in Bangladesh

The taxation system in Bangladesh has been a subject matter of criticism over a last few years. The system is characterized by a large number of incentives, tax holidays and concessions as a result of which the share of corporate taxation to total tax collection by the Govt. has come down drastically over the past few years.

Taxes on corporate profits, of both domestically and foreign owned companies amounts insignificant as a 0.95% of GDP in Bangladesh, compared with more than 6% in developed nations. The main reason cited for this low contribution is the tax incentives granted by the Govt., which are very liberal as compared to its counterpart countries.

It is probably with tax reform in view that the Govt carried out certain reforms in depreciation laws in Budget 1998-99. Among other provisions, the important change that would have a far reaching effect on leasing companies is the change in depreciation system by scrapping of initial year depreciation allowance, extra shift allowance and normal depreciation, replaced by a single rate of normal depreciation.

The following are the important features of taxation of leasing in Bangladesh:

No true lease guidelines

There are apparently no rules to distinguish genuine lease transactions from plain financing transactions. This is one of the most important rules to have in a developing market and an important lesson can be learnt in this regard from India.

A lease, in order to qualify for tax deduction, has to be different from a plain financial transaction. Evidently, no depreciation benefit can be claimed in case of a transaction of simple financing of an asset. In addition, one must also appreciate that if an agreement has the color of a lease transaction but in essence is nothing but a financial transaction, the outer form of the transaction will be ignored, and based on its intrinsic substance, it would be reckoned as a financial transaction.

The meaning of the above is that if a lessor in Bangladesh writes a lease transaction that has the legal form of a lease, but is in substance nothing but a financing transaction on the security of an asset, such lease will not be regarded as a lease but as a secured financing. Obviously, it is not enough to call an agreement a lease agreement: in taxation, nomenclatures are ignored and the reality is looked into.

To guide parties as to what are the important attributes of a lease transaction that would distinguish it from a financial transaction, one would find, in advanced leasing markets, detailed rules or standards that define a true lease. In absence of such guidelines, it is quite common, particularly in nascent stages of development of an industry, for players to make mistakes, which turn out to be costly both for the revenue and for the players themselves.

India, like Bangladesh, does not have true lease guidelines. As a result, around 1987-1989, when leasing grew very rapidly in the country, a number of lessors wrote leases for assets that never existed. There was obviously no intent to cheat the revenue, but such practices were founded on a premature belief that all agreements, which look like lease agreements will be acceptable for, tax purposes.

Even today, in spite of the fact that India today is a mature market compared to many others, a number of Indian lessors make mistakes, which would only prove to be fatal over time.

The trouble with a no-rule regime is that it encourages unintentional malpractices. Of course, tax avoidance and evasion can exist even where there are elaborate rules, but the trouble with absence of rules is that it breeds innocent non-compliance.

Bangladesh must notify true lease guidelines, and sooner the better. It must, most importantly, educate taxpayers on what is the elementary distinction between a lease and a hire-purchase transaction, since in the latter case; the lessor cannot claim depreciation.

No clear distinction between lease and hire purchase

The difference between lease and hire purchase transactions is a crucial difference for all countries that allow depreciation based on ownership of an asset. It is a basic rule of law that “ownership” for tax purposes is not merely legal ownership – it must be backed by beneficial ownership. Beneficial ownership implies the right to attain benefits of ownership at some point of time. In a hire-purchase transaction, the legal owner (finance company) cannot be treated as beneficial owner, since, having provided the user with a right of purchase; the owner has divested himself of beneficial interest completely.

Currently in Bangladesh many of the lease transactions are in fact hire-purchase transactions, as the sale of the asset to the lessee, even if not incorporated in the contract of lease, is mostly inherent and pre-agreed.

This practice, which in opinion of the author will be a problem over time as the revenue officials get more of education on lease taxation, can be resolved either by proper training or by a proper law.

Fund Collection

Non-bank Financial Institutions financial intermediaries that accumulate funds by borrowing from the general public and lend the same to meet specialized financing needs, but are prohibited to accept such deposits payable either on demand or by cheque, draft, etc, and operate checking accounts for which their liabilities are not a part of the money supply. The first non-bank financial institution (NBFI) was a fire insurance company established in 1680 in London.

Although all financial institutions have a common basis for their operations and some role with respect to lender-borrower relationships, there are some fundamental differences between the banks and NBFIs. The liabilities created by the banks are unique in that these liabilities are themselves ‘spend able’ i.e., the holders of the deposits use the deposits in banks as money whereas the liabilities of a NBFI, such as a building society cannot be used in this way. Banks can actually increase the total volume of spending in the economy by their capacity to add to the stock of credit in existence. But the non-bank financial institutions do not have that capacity and they are merely ‘honest brokers’ and transmitting funds, which have been created elsewhere, eg, by the Bangladesh Banks now have less savings deposits and more demand deposits. The NBFI, such as

A leasing company receives additional funds and is capable of adding to its mortgage lending by withdrawing from its larger demand deposits kept with the deposit money bank. The leasing company thus adds to the volume of credit and enables additional spending (on house purchase) to take place. The combination of financial assets created by the banks and NBFIs for ultimate lender varies depending on the origin of the asset.

The operations of NBFIs in Bangladesh are regulated by the Bangladesh Bank. The grant of authority to engage in borrowing from the general public is normally based on such factors as minimum capital requirement, quality of management, compliance with the concerned laws, rules, and regulations, and stability of financial standing. NBFIs may grant loans to their members and the general public up to a certain amount and may also engage in trust functions with prior permission of the central bank. They are not allowed to engage in foreign exchange transactions.

NBFIs are specialists of the intermediation process and their origins can be traced to the development of specialized financial institutions. Some survived centuries of changing economic and financial developments. Others appeared in response to special opportunities or needs and have disappeared just as quickly. Their survival and existence depend upon their ability to (a) offer contracts that serve the needs of specialized customers, (b) maintain a spread between the rate they pay for funds and the rate they receive that will support their costs, and (c) meet commitment to suppliers of funds.

The non-bank financial institutions operating in East Pakistan were the Industrial Development Bank of Pakistan, Equity Participation Fund, Pakistan Industrial Credit and Investment Trust Corporation, Investment Corporation of Pakistan, National Investment Trust and insurance companies. Such institutions established in Bangladesh in the 1970s include the House Building Finance Corporation (1973) and the Investment Corporation of Bangladesh (1976). Other NBFIs established in the country up to 31 August 2000 are United Leasing Co., Industrial Development and Leasing Company, Industrial Promotion and Development Company, Saudi-Bangladesh Industrial and Agricultural Investment Company, Phoenix Leasing Company, Union Capital, Uttara Finance and Investment, UAE-Bangladesh Investment Company, International Leasing and Financial Services, Prime Finance and Investment, Bahrain Bangladesh Finance and Investment Company, Bay Leasing and Investment, Delta-BRAC Housing Finance Corporation, Vanik Bangladesh, Peoples Leasing and Financial Services, Infrastructural Development Company, Bangladesh Industrial Finance Company, National Housing Finance and Investment, MIDAS Financing, First Lease International and Bangladesh Finance and Investment. These institutions extended their business in industrial, commercial and housing financing, and in the stock market activities. They are also granted permission by the Bangladesh Bank to participate in the inter-bank money market transactions. As on 31 December 1999, the total paid up capital and reserves of these NBFIs in Bangladesh stood at Tk 5.885 billion and their investment in different sectors totaled to Tk 12.087 billion.

Bangladesh Bank is empowered to oversee and regulate the affairs of the NBFIs under the provisions of the Financial Institutions Act 1993 and the Financial Institutions Rules 1994. To improve the quality of financial intermediation and meet up the growing needs of funds for financing investments in different sectors of the economy, the government intends to intensify the financial market by granting permission to establish private NBFIs in conjunction with the private commercial banks. At present, non-bank financial sector of the country comprises investment and finance companies, merchant bankers, leasing companies, mortgage banks, insurance companies, and the Capital Market Although small, the NBFI sector in Bangladesh is a growing component of the entire financial sector and NBFIs as a group create an opportunity to improve financial intermediation for the economy. NBFIs account for only 4% of the assets of the financial sector, compared to 70% accruing to the nationalized commercial banks (NCB) and 25% to the local private banks. NBFIs, however, account for 25% of the term financing (FY 1998-99) through leasing, project finance and merchant banking activities. The volume of term finance they provided increased at the rate of 41% per annum, while that of the NCB decreased by 40% between 1997 and 1999.

Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all the banks. It performs the traditional central banking roles of note issuance and of being banker to the government and banks. It formulates and implements monetary policy manages foreign exchange reserves and supervises banks and non-bank financial institutions. Its prudential regulations include: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. BB has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problems arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.

Interest Rate Policy

Under the new interest rate policy, which became effective in January 1990, all deposit rates are decontrolled. The market, except for exports, freely determines all lending rates.

Capital Adequacy

In January 1996, BB announced a new policy on Capital Adequacy along the lines recommended by the Basle Committee on banking supervision. The Revised policy on capital adequacy requires scheduled banks to maintain at least 9% of off-balance sheet risk and risk in different types of assets as capital.

Loan Classification and Provisioning

Bangladesh Bank introduced new accounting policies with respect to loan classification, provisioning and interest suspense in 1989 with a view to attaining international standards over a period of time. A Revised policy for loan classification and provisioning was introduced from 1st January, 1999.The Revised policy calls for an independent assessment of each loan on the basis of qualitative factors and objective criteria. Each loan is branded with the worst level of classification resulting from these independent assessments.

If a Continuous Credit or a Demand Loan remains non-performing for 6 months or more it is classified Sub-standard. It is classified as Doubtful if it remains non-performing for 9 months and classified as Loss if non-performing for 12 months or more.

In the case of a Term Loan, which is repayable within a maximum period of 5 years, if any installment is not repaid within the specified period and if the time-equivalent of such unadjusted balance is 6 months, it is classified Sub-standard. A Term loan is classified Doubtful and Loss if the time-equivalent of unadjusted balance is 12 months and 18 months respectively.

Agricultural Loan and Micro-Credit is classified Sub-standard if non-performing for 12 months, Doubtful if non-performing for 36 months and Loss if non-performing for more than 60 months.

Under the existing system scheduled banks are required to maintain provisions against unclassified and substandard loans in addition to doubtful and loss loans. They are allowed to book interest against classified loans only on cash basis.

Whether a credit is classified or not under the objective criteria, it is subjected to classification under qualitative judgment if any doubt arises regarding repayment of loan.

Foreign Exchange System

On March 24, 1994 Bangladesh Taka (domestic currency) was declared convertible for current transactions in terms of Article VII of the IMF Articles of Agreement. Consequent to this, current external settlements for trade in goods and services and for amortization payments on foreign borrowings can be made through banks authorized to deal in foreign exchange, without prior central bank authorization. However, because resident owned capital is not freely transferable abroad (Taka is not yet convertible on capital account), some current settlements beyond certain indicative limits are subject to bonafides checks.

Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly.

Exchange Rate Policy

The exchange rate policy of Bangladesh Bank aims at maintaining the competitiveness of Bangladeshi products in the international markets, encouraging inflow of wage earners’ remittances, maintaining internal price stability, and maintaining a viable external account position. Prior to the inception of floating exchange rate regime, adjustments in exchange rates were made while keeping in view the trends of Real Effective Exchange Rate (REER) index based on a trade weighted basket of currencies of major trading partners of Bangladesh and the trends of other important internal and external sector indicators. However, the interbank foreign exchange market sets the exchange rates for customer transactions and interbank transactions based on demand-supply interplay; while the exchange rates for the Bangladesh Bank’s spot purchase and sales transactions of US Dollars with ADs is decided on a case to case basis. Bangladesh Bank does not undertake any forward transaction with ADs. The ADs are free to quote their own spot and forward exchange rates for interbank transactions and for transactions with non-bank customers.

Bank Licensing

Bank Company Act, 1991, empowers BB to issue licenses to carry out banking business in Bangladesh. Pursuant to section 31 of the Act, before granting a license, BB needs to be satisfied that the following conditions are fulfilled:

“That the company is or will be in a position to pay its present or future depositors in full as their claims accrue; that the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interest of its present and future depositors; that, in the case of a company incorporated outside Bangladesh, the Government or law of the country in which it is incorporated provides the same facilities to banking companies registered in Bangladesh as the Government or law of Bangladesh grants to banking companies incorporated outside Bangladesh and that the company complies with all applicable provisions of Bank Companies Act, 1991.”

Licenses may be cancelled if the bank fails to comply with above provisions or ceases to carry on banking business in Bangladesh.

Commercial Banks

The commercial banking system dominates Bangladesh’s financial sector with limited role of Non-Bank Financial Institutions and the capital market. The Banking sector alone accounts for a substantial share of assets of the financial system. The banking system is dominated by the 4 Nationalized Commercial Banks, which together controlled more than 54% of deposits and operated 3388 branches (54% of the total) as of December 31, 2004.

Specialized Banks

Out of the 5 specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector while the other two (Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS)) are for extending term loans to the industrial sector.

Financial Institutions (FIs)

Twenty-eight financial institutions are now operating in Bangladesh. Of these institutions, 1(one) is govt. owned, 15 (fifteen) are local (private) and the other 12(twelve) are established under joint venture with foreign participation. The total amount of loan & lease of these institutions is Tk.29, 729 million as on 30 April 2003. Bangladesh Bank has introduced a policy for loan & lease classification and provisioning for FIs from December 2000 on half-yearly basis. To enable the financial institutions to mobilize medium and long-term resources, Government of Bangladesh (GOB) signed a project loan with IDA, and a project known as “Financial Institutions Development Project (FIDP)“ has started its operation from February 2000. Bangladesh Bank is administering the project. The project has established “Credit, Bridge and Standby Facility (CBSF)“ to implement the financing program with a cost of US$ 57.00 million.]

Capital Market The Capital market, an important ingredient of the financial system, plays a significant role in the economy of the country.

The SEC has issued licences to 27 institutions to act in the capital market. Of these, 19 institutions are Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue Manager and Underwriter.

I) Stock Exchanges

There are two stock exchanges (the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE), which deal in the secondary capital market. DSE was established as a public Limited Company in April 1954 while CSE in April 1995. As of 30 June 2000 the total number of enlisted securities with DSE and CSE were 239 and 169 respectively. Out of 239 listed securities with the DSE, 219 were listed companies, 10 mutual funds and 10 debentures.

ii) Investment Corporation of Bangladesh (ICB)

The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programmes, and maintains investment accounts, floats and manages closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as generate demand for securities. ICB also operates in the DSE and CSE as dealers.

The insurance Sector is regulated by the Insurance Act, 1938 with regulatory oversight provided by the controller of Insurance on authority under the ministry of commerce. 21 companies provide general insurance and 6 companies provide life insurance. The industry is dominated by the two large, state-owned companies–SBC for general insurance and JBC for life insurance–which together command most of the total assets of the insurance sector.

Micro finance Institutions (MFIs)

The member-based Micro finance Institutions (MFIs) constitute a rapidly growing segment of the Rural Financial Market (RFM) in Bangladesh. At present, Grameen Bank is the only formal financial institution among them, established in 1983 under a special law with the initial support from Bangladesh Bank. The poor borrowers of Grameen bank who are mostly women own the bank and it is the pioneer organization of this type. Besides Grameen Bank there are more than 1000 semi-formal institutions operating mostly in the rural sector of the country; BRAC, ASA, and PROSHIKA are being considered three big NGO-MFIs. These institutions have an explicit social agenda to cater to the needs of the poorer sections of population, and have a focus towards women clients.

Till June 2002 the total coverage of micro finance programs in Bangladesh is approximately 13 million households. Four big institutions including Grameen Bank dominate the micro finance market of Bangladesh. Grameen Bank, BRAC, ASA, and PROSHIKA account for 60% of the total amount of outstanding loans made by all MFIs, and it is widely believed that top 20% institutions account for 80% of the total market. The Grameen Bank alone provides about one-third of the total amount of outstanding micro loans. There is no cap or spread on interest rate offered for deposit and loan in case of NGO-MFIs. However, in practice on average NGO-MFIs offer mostly 5-7% interest on deposits to the members and charge 15% interest on loan in flat method.

At present NGO-MFIs are not regulated or supervised or monitored by any single authority in Bangladesh; they are under the system of off-site supervision by the authorities that provide them registration as non-government organizations (NGOs). However, the regulatory issue has come to the forefront because MFIs are providing financial services and products to the poor, outside the formal banking system.

Considering the need to develop an appropriate regulatory and supervisory system for this sector the Government of Bangladesh has established a Unit named “Micro finance Research & Reference Unit (MRRU)” in Bangladesh Bank. A high power national Steering Committee under the leadership of Governor of the bank looks after the various functions of the unit. The Committee is also responsible for formulating a uniform guideline and the legal framework of a regulatory body for this rapidly growing financial sector.

The unit has already published an operational guideline for these NGO-MFIs with the help of the committee and has been collecting quarterly information since January 2004 on governance, savings, credit, receipt and payment from them. The unit is also providing training to these institutions on the operational guideline supplied to them. Recently the committee has submitted a draft law to the Government, hence it is expected that after the promulgation of the law this sector will be under formal financial system in near future. All these programs mentioned above (guideline, training and information collection) going on under the unit are being considered as the background work towards the formulation of a full-fledged regulatory framework for the micro finance sector in Bangladesh.

Case study on Prime Finance & Investment Limited

Prime Finance & Investment Limited is one of the leading Non-Banking Financial Institutions. It was listed as a financial institution in 1996. The company call themselves as an Investment banker.It provides diversified financial services to the business sector. It is the fifth ranked leasing company in Bangladesh. With a view to expand the business into the consumer market, PFI management is planning to introduce new products in its product portfolio. Before the introduce of the product in the market, a comprehensive competitor and consumer analysis has been done by the author as a requirement of his internship.

The company is one of six that does not use the word “Leasing” with their name.

Corporate Profile

Prime Finance & Investment Limited commenced its journey in the year 1996 with the spirit of rendering innovative, customized and cost effective financial solutions to the corporate houses of Bangladesh as a closely held public limited company. Realizing the untapped market potential for the innovative financial institutions, a number of reputed corporate houses along with some individual professionals joined hands to form PFI with an endeavor to contribute to industrialization and to actively participate in the capital market development of the country.

The spirit and Corporate philosophy of PFI is reflected in the diversified product and service mix of the company. PFI is constantly engaged in its effort to broaden its range of product offering from financial leasing, equity financing, issue management, underwriting and many more. PFI is slowly but surely emerging as one of the innovative financial institution in Bangladesh known for its creative pursuits and professional management endeavoring towards offering of a commercial supermarket of financial services to the customers. Result – an extensive clientele – a broad spectrum of industrial houses from fledgling entrepreneurs to many among the market leaders.

A new economic order is emerging in the world we operate in with different social and political implications. Century old bottlenecks that once cordoned off the economic units from venturing into uncharted areas have vanished with the emergence of new technology and business concepts. PFI is poised to fill the void.

In today’s competitive world there are few opportunities to make a big difference and many opportunities to make a little difference. At PFI, we strive to seize all these opportunities with a pro-market attitude making a big difference to the clients.

Mission Statement

To be the most innovative investment force enterprising the creation of wealth.

Goals

To be a commercial supermarket for financial products and services.

To establish a strong market presence

To optimize stakeholders’ rewards.

Values

To maintain integrity and intellectual ingenuity of highest standard.

To infuse professional and entrepreneurial spirit among the associates.

Sponsors’ Profile

Mr. K. M. Khaled

Mr. K. M. Khaled, Director of Getco Group, is the Chairman of Prime Finance & Investment Limited and represents Khaled Textile Mills Ltd. Mr. Khaled started his career as Assistant Engineer in East Pakistan Water and Power Development Authority and was promoted to the rank of Executive Engineer in 1967 and resigned from there in 1975. In the same year he started his business career as a Sponsor Director of Greenland Engineers & Tractors Co. Ltd (GETCO), dealer of Caterpillar Inc. – a world leader in the manufacture of Construction Equipment, Diesel and Gas Engines and Generators. He is also the Director of Prime Bank Limited and Prime Insurance Co. Ltd. He is also associated with quite a good number of business organizations engaged in trade, services and manufacturing activities. In connection with his business and conference, Mr. Khaled has visited many countries of the world.

Qazi Saleemul Huq

Qazi Saleemul Huq, Chairman of GQ Group, is the Director of Prime Finance & Investment Limited and represents GQ Enterprise Ltd. Mr. Huq has set up profitable businesses like GQ Ball pen Industries, GQ Enterprise Ltd., GQ Foods Ltd., GQ Marketing Ltd., Gq Properties Ltd., Gq Technologies Ltd., Maladesh International (Pvt.) Ltd. He is also associated as Sponsor Director with Prime Bank Ltd., Prime Insurance Ltd., DeltaSoft Ltd. (ISP & IT Solution provider) and GEP Holding Ltd. (Real State Developer). He was elected Member of the Parliament in 5th, 6th & 8th National Assembly. He was nominated C.I.P (Commercially Important person) by Government of Bangladesh for 8 years since 1991. Moreover, he was awarded “Top Ten Companies Award of Bangladesh” twice by Dhaka Stock Exchange and as “Best entrepreneur of the year Award“ by IBA Alumni Association. Apart from this, he has established private hospital in Dhaka and several educational institutions in Magura. Qazi Saleemul Huq has visited many countries for business development and also as member of Bangladesh Government delegation.

Mr. M. A. Wahab

Mr. M. A. Wahab, Chairman of Mawsons Limited, is the Director of Prime Finance & Investment Limited and represents Mawsons Limited. Mr. Wahab started his career in 1961 as Probationary Officer in United Bank Ltd. During the tenure of service in UBL now called Janata Bank, he held important positions like General Manager and had got experience in different areas of banking operations. In 1984 he joined Rupali Bank as General Manager and served there till June 1985. He was the Deputy Managing Director of National Bank Limited from 1985 to 1995. During the period from April 22, 1993 to May 31, 1994 he acted as Managing Director (Current Charge) of National Bank Limited. He is also associated with different financial institutions & insurance companies like Prime Bank Ltd., Prime Insurance Company Ltd., Prime Life Insurance Company Ltd., Fareast Finance & Investment Ltd. and others.

Mr. Md. Nader Khan

Mr. Md. Nader Khan, Managing Director of Pedrollo Group, is the Director of Prime Finance & Investment Limited and represents Pedrollo N.K Limited. Mr. Khan started his business career in 1969 and has build up a good number of business entities engaged in the area of trading, indenting, manufacturing etc. He is the Managing Director of Pedrollo NK. Ltd. and Polyexprint Ltd. Mr. Khan is also the Director of Prime Bank Ltd. and Prime Insurance Co. Ltd. He is also the Director of Chittagong Commerce and Industry since 1989. Apart from business, he has been actively involved with Lions International for last 23 years. He is also associated in many other social organizations. Mr. Khan has widely traveled covering all the major cities & business center of the world.

Mr. M. Shahadat Hossain Kiron

Mr. M. Shahadat Hossain Kiron, Managing Director of Dekko Group, is the Director of Prime Finance & Investment Ltd. and represents Agami Apparels Ltd. Mr. Kiron started his career through joining his family enterprise just after finishing his University education. Now he is the CEO of Dekko Group. During 1950 Roxy Paint was launched and then the business expanded towards the world of textile market with its readymade garments. Later on he set up a 100% export quality garments accessories factory with state-of-the-art technology from Europe to produce world class accessories like Buttons, Woven Labels, Poly Bags, Paper and Plastic products used in manufacturing various type of garments. With persistent effort, he has increased his business to Dekko garments Ltd., Dekko Apparels Ltd., Dekko Fashion Ltd., Dekko Accessories Ltd., Agami Aparels Ltd., Agami Aparels Ltd., Agami Accessories Ltd. and Globus Garments Ltd. His talents and devotion led the group to the production of Garments including shirts, jackets, jogging suits and also Paints & Varnish including Synthetic Enamel, Plastic Emulsion, Hammer Finish, Marine Paint, Clear Varnish etc. He is also the Director of Prime Insurance Co. Ltd. Mr. Kiron has widely traveled around different cities & business center of the world.

Mr. Md. Aminul Haque

Mr. Md. Aminul Haque, Managing Director of Getco Group, is the Director of Prime Finance & Investment Limited and represents Acorn Limited. Mr. Haque started his career in Industrial Development Bank of Pakistan, now called Bangladesh Shilpa Bank. In 1964, he joined the then East Pakistan Water and Power Development Authority as Assistant Engineer. Later on he joined Pakistan National Consultant in 1967 as Senior Engineer. He worked there up to 1972 In the same year he founded Greenland Engineers & Tractors Co. Ltd. (GETCO), dealer of Caterpillar Inc.– a world leader in the manufacture of Construction Equipment, Diesel and Gas Engines and Generators. He is also the Director of Metco Ltd., Prime Bank and Prime Insurance Co. Ltd. Apart from this, he is associated with quite a good number of business organizations engaged in trade, service and manufacturing activities. In connection with his business and conference, Mr. Haque has visited many countries of the world.

Mr. M. A. Khaleque

Mr. M. A. Khaleque, the Managing Director of Maksons (Bangladesh) Ltd, is the Director of Prime Finance & Investment Limited. He started his career by establishing Maksons in 1988, which was mainly engaged in export, import, trading, indenting, and advisory and consultancy services. Mr. Khaleque is the Sponsor Director of the Prime Bank Ltd, Prime Property Holdings Ltd. and Representative Director of Prime Finance & Investment Limited on behalf of Maksons (Bangladesh) Ltd. Mr. Khaleque is the founding Vice President of Pirojpur Chamber of Commerce and Industries. He is also associated with many social organizations. As a part of his social work, he has established many educational institutions. Mr. Khaleque has visited many countries of the world.

Mr. Azam J. Chowdhury

Mr. Azam J. Chowdhury, Managing Director of East Coast Group of Companies, is the Sponsor Director of Prime Finance & Investment Limited and represents East Coast Shipping Lines. Presently Mr. Kutubul Alam Chowdhury, one of the Directors of East Coast Group, is representing as a Director of Prime Finance & Investment Limited. East Coast Group comprises of East Coast Trading (Pvt.) Ltd., Greenways Industries (BD) Ltd., Gulf Resources Inc., Surma Oil Company Ltd., EC Distribution Ltd., EC Engineering Co. Ltd., EC Securities Ltd. Mr. Azam J. Chowdhury is the Chairman of the Board of Director of Green Delta Insurance Company Ltd. He is also the Director of Delta Brac Housing Co. Ltd. Mr. Chowdhury is the President of Bangladesh-Norway Chamber of Commerce & Industry. He is also the Director of Prime Bank Ltd., Union Capital Ltd., Prime Property Development Ltd. and Ekushey Television Ltd. He has publications of about 20 articles on Political Affairs, Business and Shipping which was published in major daily newspapers/journals at home and abroad. Mr. Chowdhury has widely traveled around different countries of the world.

Mr. M. N. H. Bulu

Mr. M. N. H. Bulu, Chairman and Managing Director of Berstoff Group, is the Director of Prime Finance & Investment Limited and represents Abeeco Industries Ltd. The Group comprises of National Chemical Mfg. Co. Ltd., Shafkat PVC Sole industry Ltd., Bulu International, Bulu Ocean Tower, B.N.S. Centre, Bulu International Indenting unit etc. He started his business in 1980 with marketing of Rexene & PVC products. Subsequently, he has expanded his business in different industrial sectors viz, Plastics, Chemicals, Pvc Sole, Textiles, Hosiery, Banking, Financial, Insurance & Real States. Presently, his Group comprises of 22 concerns in 10 sectors. He is the Director of Dhaka Bank, Homeland Life Insurance Co. Ltd. and Pioneer Insurance Co. Ltd. He has achieved award for being a renowned Industrialist of the country. Apart from this, he is also the member of various Industrial and Trade Associations. He is the President of Bangladesh Rexin & Plastic Sheet Manufacturer’s Association and also member of all the recognized clubs in Bangladesh. Mr. Bulu has widely traveled around the major cities & business center of the world.

Invest in people

PFI continues to invest in human resource to provide them the opportunity to develop new skills and talents. Development of human resource base is one of the key components of the overall corporate strategy of PFI. The entire gamut of management structure is flexible which allows the executives freedom to foster entrepreneurial spirit to emerge as managers and leaders.

Innovation is and will continue to be the core of the corporate philosophy. PFI continues to encourage fresh thinking at all levels to enhance the ability of the company to adapt and respond with speed, a competence PFI wants to be recognized for in the market place.

Areas of Operation

PFI is a multi-product financial institution. Activities of PFI can be divided into following major areas of operation:

Fund Based Activities

Fee Based Activities

Fund Based Activities

(a) Lease Financing

Lease Financing is the principal fund based activity of PFI. Until now the company concentrated only on full payout financial lease transaction for financing a wide range of capital machinery, equipment and vehicles. We offer leasing as a modern financial instrument for managing corporate investments in movable equipment our customers represent different segments of local markets. We provide services to developing companies, stable middle-class enterprises and market-leading concerns.

Financial Flexibility

Rather than having your capital tied in one purchase, leasing allows you to utilize that capital elsewhere to general higher profits, it also reduces your cash outflow.

Prompt service

As appraisal and documentation processes are simple, prompt and convenient service would ensure quick implementation of the project.

Off balance sheet financing

Since Prime Finance owns the equipment the leased equipment does not appear on your balance sheet, your financial ratios improve.

No need to raise new capital

Raising new equity or debt for capital expenditure has many constraints that can be avoided when you opt for leasing.

Avoid budgetary constraints

When your budget does not allow you to buy equipment, leasing can make the acquisition possible. Since rental payments are decided in advance, budgeting becomes easier.

Tax benefits

Lease rentals are treated as revenue expenditure and are entirely deductible for tax purposes. This provides a greater tax benefit for you in comparison to borrowing.

(b) Short Term Financing

We offer short-term cash finance to the corporate houses with a view to provide liquidity comfort in emergency situation. With this the companies finance and manage their accounts receivable and consequently optimize their business growth. To customize our services and to fulfill the diversified needs of our honorable customers we have categorized our short time finance offerings into two different modules:

Direct finance for working capital.

Work order finance.

Bill Discounting

Bridge Finance

(c) Long-term finance

We provide long-term finance to the industrial houses varying for the period from more than 12 months depending on their need.

(d) Bridge/Equity Finance

We have expanded the service range of Bridge Finance beyond the concept of merchant banking. We provide short term bridging finance in anticipation of all types of immediate long term financing ranging from Term Loans to IPO or Equity investment.

(e) Bill Discounting

Another form of short tenure financing that PFI has introduced recently. Through this companies can infuse liquidity into their operation by way of discounting their bills. This specific mode of financing can prove to be extremely effective in receivable and working capital management especially for the manufacturing concerns. Two basic types of Bills are accepted for discounting

Purchase Bill

Sales Bill

Fee Based Activities

Fee based activities of PFI can be broadly divided onto following major areas:

Merchant Banking Activities

Corporate Finance Activities

(a) Merchant Banking Activities

PFI is a major force in the merchant banking industry of the country engaged in capital raising function. PFI has successfully raised capital for companies representing different economic sectors. The key to our success lies in structuring the right financing instrument for each particular situation, taking into account our clients’ requirements as well as those of the investor. The types of financing instruments we typically structure are common shares, convertible bonds, preferred equity, loans with equity kickers, bonds with warrants, and redeemable shares or bonds, depending on the objectives of the strategic investor or the financial investor involved. By matching the specific requirements of our clients with the right products and investors, we create the optimal capital raising solution.

Merchant banking services at PFI can be subdivided into following major areas:

Issue Management

Underwriting

Private Placement Management

Issue Management

Issue Management is the core function of the merchant banking arm. Over the years PFI has developed expertise to offer professional services to manage fund raising from public equity market. Major functions performed as Issue Manager are as follows.

Analysis Of Issue

Company Appraisal

Financial

Economic (Technical)

Market

Management

Generating options

Analysis of ratios as well as economic and financial indicators

Promotion of Issue

Assessing the need of the issuer

Capital mix and restructuring of capitalization

Choice of options

Determining the size of the issue

Instrument designing

Determining the appropriate timing for the issue.

Management of Issue

Underwriting

To provide a protective umbrella to the issuer company, PFI offers Underwriting services. Apart from acting as underwriter to public issue, we also act as the Arranger of Underwriting. Major services for underwriting arrangement are as follows.

Syndication

Company brief distribution

Presentation & persuasion

Collection of consent

Allocation

Documentation

Private Placement Management

PFI acts as Private Placement Managers on behalf of the companies. Private equity is placed with institutional investors facilitating smooth and expeditious capital rising. As placement manager PFI provides the following services.

Other Merchant Banking Services

Arrangement of bankers to the issue

Arrangement of trusteeship in case of debentures

Public offer & invitation to subscribe

(b) Corporate Finance Activities

PFI offers an extensive range of professional corporate finance services. We specialize in tailor-made, value-added solutions, which are particularly suited to small and mid-sized companies.

We also provide a full range of advisory services to private and listed companies, including capital raising, mergers and acquisitions, listing rules compliance work and engineering financial transactions.

We serve our clients in their best interest, creating value for them and compliment their business expertise with our own, to maximize their opportunities for growth.

At PFI we believe that our clients are looking for innovative solutions and proactive advice, not merely strategies. Whereas some firms pride themselves on the product they offer clients, we pride ourselves not only on the outstanding quality, but also on the individualized nature of our service. We team up with you and act with your long-term future in mind. Our size and unique qualifications allows us to respond to your needs quickly, and with our best people.

Many small businesses tend to operate within the traditions and practices of their industry. Within this context, no company ever becomes a leader by following the crowd. At PFI we employ our technical expertise and provide innovative solutions to create new paradigms for greater possibilities and growth for our clients.

Portfolio management

Both the institutional and individual investors may find the portfolio management services provided by Prime Finance & Investment Limited useful. Prime Finance & Investment Limited manages the investment portfolio of the investors with professional acumen and utmost trust and sincerity.

Registered mortgage of the Project Land / other security as required by Prime Finance.

Structured Financing Strategic Advisory Service

Often middle market companies outgrow their financing sources or find they are not adequately leveraging their balance sheet or cash flow with traditional bank debt. When this occurs, a company may need to restructure its balance sheet.

The first step required when contemplating a restructuring is to consider all options including, asset based loans, senior cash flow loans, institutional private placements, equipment financing, mortgages, asset securitizations, operating or capital leases, leveraged leases, sale and lease backs, subordinated debt, preferred stock, common equity, venture capital etc. Often more than one capital alternative will be chosen in order to minimize dilution to the shareholders. With a myriad of options and alternatives available, companies may need to engage an advisor to help them through the process.

Every form of capital has its positive features, its constraints, and a cost. Prime Investments reviews and evaluates the implications various forms of capital are expected to have on the client’s pro-forma results and the ultimate effect on shareholder value. We then work with management in determining which option or options will prove effective in helping the company achieve its goals while minimizing cost.

When different financing options are being evaluated, understanding all of the structural implications and intricacies of closing multiple financings is important. This process can be tedious and have long-term effects on a company’s balance sheet. PFI will help you in analyzing the relative costs and benefits of various options in deriving the best overall strategy for your specific situation.

Project Advisory Service

Project advisory services of PFI is divided into three broad categories of services:

Investment Advisory Service

Bureau Service in case of Joint Venture Project

Investment Banker Service

As the Investment Advisor to the project, PFI’s Services cover the following areas:

i) A detailed study on the market of the proposed project:

Market opportunity of product.

Demand and Supply Analysis.

Current and Future Market Analysis

Marketing & Distribution Strategy

Pricing Structure and Strategy.

ii) Prepare a bankable project report that includes:

Determination of suitable product line and capacity based on the outcome of market study

Estimation of the total cost of the project including working capital requirements.

As the Finder of the Joint Venture Partner and Coordinator to the project, Bureau of PFI undertakes on a best effort basis to provide the following services:

Introduces to a potential Joint Venture partner acceptable to the client

Provides preliminary information on the potential Joint Venture Partner, its business and promoters.

Organizes and facilitates in preliminary discussions on the proposed Joint Venture project.

As the Investment Banker to the project, PFI’s services cover the following areas:

Structuring of a financial plan for the project to ensure the required rate of return to the shareholders.

Mobilization of debt capital for the project

Identifying, if necessary, institutional equity partners for the project

Merger & Acquisition

Creating synergy through merger and acquisition is still a relatively new concept in our country. It is, however, expected that a significant number of merger proposals will be forthcoming in near future once the local corporate houses become more familiar with the benefits and mechanism of such synergy. Prime Finance can help clients achieve this synergy by employing its expertise in the different aspects of merger/amalgamation and managing the whole process.

Performance for the year 2004

The financial performance of PFIL has been in ascending trend after YE 1999. During YE 2004 the operating performance of PFIL was found to be satisfactory among its peer group. Profit before income tax stood at Tk. 77.67 million in YE 2004 from Tk. 58.85 million in YE 2003, representing 31.98% growth. Earning per share has increased to Tk. 40.10 in YE 2004 from Tk. 21.57 in YE 2003. The Board declared 20.00% cash and 20.00% stock dividend during YE 2004 and 2003 respectively. Operational revenue of the company has been increased to Tk. 337.12 million in YE 2004 from Tk. 219.52 million in YE 2003, representing 53.57% growth. Satisfactory growth in interest on lease finance (50.54% of total operational revenue) and direct finance (16.69% of total operational revenue) has been observed during YE 2004. The growth of interest income of lease finance and direct finance were 19.59% and 60.74% respectively. Income from sale of securities (considers as volatile source of income) has contributed significantly in the profitability in TE 2004, which was Tk. 73.37 million (increased 560.00% form the preceding year). Financial and management expense of the company has increased by 15.83% and 50.84% respectively in YE 2004. Bad loan provision during the year also soared up by 436.81% due to deteriorating asset quality and additional provisioning. Thus, the overall operational expense has increased to Tk. 259.94 million in YE 2004 (increased by 64.82% over the preceding year). Salary and allowances expences has increased from Tk. 13.90 million in YE 2003 to Tk. 20.94 million in YE 2004, representing 50.67% increase over the year.

While making a peer analysis it has been observed that PFIL earned 21.41% net profit margin in TE 2004 against peer average of 24017%, representing relatively low margin earning of the company. The company has been experiencing deteriorating net profit margin during the last two years. However, return on average equity has soared up to 31.59% in YE 2004 from 23.13% in YE 2003 despite significant changes in equity base (15035% growth in YE 2004). Conversely, return on average assets has decreased during YE 2004 and stood at 3.81% from 4.55% in YE 2003, indicating significant outside borrowing (40.38% growth in YE 2004) to meet increasing funding requirement, While reviewing the operating efficiency it is observed that PFIL has been operating business with high cost of operation as well as high general and administrative expenses against the earning assets as compared to some of its competitors. Yield per one taka staff cost was also low. The cost to income ratio was 77.10% against peer average of 66.21% in YE 2004. G&A expense to average earning assets ratio was 2.02%, against peer average of 1.17% in YE 2004. The company earned before tax and provision of Tk. 7.87 by spending one taka staff cost against peer average of Tk. 11.50, representing low productivity of the staffs than the peer average.

Contracts & Disbursements

During the year the company contracted and disbursed the following amount with various parties:

2004

2003

Contracted

Taka

Disbursed

Taka

Contracted

Taka

Disbursed

Taka

Lease finance

774,693,275

681,209,782

834,540,715

755,488,184

Term finance

820,968,500

657,894,243

334,638,880

310,138,880

Real estate finance

32,500,000

18,000,000

–

–

Stockon hire

6,686,414

6,686,414

1,000,000

11,394,015

1,634,848,189

1,363,790,439

1,170,179,595

1,077,021,079

Risk factors & management perception

As with all investments, investors should be aware that there are risks associated with an investment in the company. This risk could result in loss of income or capital investment. Investors are encouraged to seek independent financial advice.

Internal factors

Scarcity of funds

The company’s business is dependent on availability of fund. If the company finds it’s difficult to get adequate fund to meet it business requirement then the company’s business performance will be affected. The company’s in ability of getting fund at a competitive price is a possible risk to be addressed.

The Companyhas diversified sources of fund to reduce the dependency on typical source of funds like banks financial institutions. In 2004 the company issued bonds, which were privately placed successfully. Issuance of such bonds might be used effectively as an alternative source of fund. The management of the company is working on developing source of fund.

Default of clients

A lessee or borrower may default in performing its lease or loan obligations and the company may be unable to enforce its remedies. The company’s inability to collect receivables due or to repossess lease assets in the event of default by a lessee could have a materials adverse effect on the company’s business, financial condition and/or results of operations.

Pfi Ltd follows a very methodical client selection and project appraisal process in taking investment decision, which reduces the risk of default to a great extent. Moreover we have a separate lease-monitoring department, which pursue the over due clients in a very systematic way.

Change in interest rate structure

The company’s leases are generally structured at fixed rates for specified terms. Increase in interest rates of borrowings could narrow or eliminated the spread, and hence, may have a material adverse effect on the company’s business, financial condition and/or results of operations.

Although the consequences of unusual and abrupt increase in borrowing rate cannot be avoided but the company will definitely take all the appropriate measures to minimize the negative consequence.

Inadequate managerial skill

The company has experienced significant growth of operation during the last couple of years. If the management fails to procure proper human resources, to increase managerial efficiency and to develop a team effort to cope with the pace of the growing business operation there might be an adverse impact on the company’s business, financial conditions and/or results of operations.

Management always plans to launch any product or under take any scheme after careful analysis its impact on the human resource of the company.

External Factors:

Market competition

The Company is operating in a highly competitive market. Major competitors have more recourses than those of the company, including better image, broader range of products, complementary lines of business etc. It is very difficult to predict in advance the move of the competitors the company will have to face in the coming years.

We are always cautions in offering products and services at a competitive terms & condition.

Change in government policy

In 2004,Companys highest exposure was in public transport sector. Changes in government policy as well as policy of foreign countries may affect adversely the business of the company.

Our strategy is to maintain our portfolio diversified in major sectors of industries in line with country’s growth scenario as well as industrial policy. We always monitor the changes in the policies of the government and adjust our strategy accordingly.

Change in fiscal policy

The company’s leasing activities generate significant depreciation allowances that provide the company with substantial tax benefits on an ongoing basis. In addition, the company’s lessees currently enjoy favorable tax treatment due to entitlement of deprecation .Any change of current tax laws may male lease financing less attractive and would have a material impact on the Company’s business, financial condition and results of operations.

We have been putting or best efforts to manage our to and accounting matters professionally. Unless a material change takes place in the fiscal policy, which would affect the leasing industry as a whole, we are prepared to address issues that may have any significant impact on the company’s business, financial condition and results of operation.

Economic slowdown

The overall demand for the company’s product is linked to macro parameters like GDP growth, demand for project finance, healthy capital markets and the overall growth of Bangladesh economy. A slowdown in economic growth will have an adverse impact on the demand for credit and quality of borrowers.

We always review the changes in the local as well as global economic factors so that we can take necessary steps to address its impact on business of our company. Due to diversified products and services the company expects to minimize the effect of aforesaid issues.

Political instability

The performance of the company may be affected by political and economic developments both in Bangladesh and worldwide. Any instance of political turmoil and disturbance in the country may adversely affect the economy in general

We don’t expect serious political instability that may significantly affect the overall business performance of the company.

Change in regulatory policy

The company operates under the specific guidelines laid down by the Bangladesh Bank as well as the securities and exchange commission (SEC). Any sudden change of the guidelines or policies formulated by Bangladesh Bank and/ or the SEC may affect the business of the company adversely.

Unless the regulatory authorities take any adverse policies, which may materially affect the industry as a whole, the business of Prime Finance & Investment Limited will not be affected that much since we always particular in complying rules and regulations of the authorities.

Development of Non Bank Financial Institutions like Leasing to Strengthen theFinancial System of Bangladesh

Non-bank financial institutions (NBFIs) represent one of the most important parts of a financial system. In Bangladesh, NBFIs are new in the financial system as compared to banking financial institutions (BFIs). Starting from the IPDC in 1981, a total of 25 NBFIs are now working in the country. As on June 30, 2001 the total amount of paid up capital and reserve of 24 NBFIs stood Tk.6901.8 million (BB, 2002). The NBFIs sector in Bangladesh consisting primarily of the development financial institutions, leasing enterprises, investment companies, merchant bankers etc. The financing modes of the NBFIs are long term in nature. Traditionally our banking financial institutions are involved in term lending activities, which are mostly unfamiliar products for them. Inefficiency of BFIs in long-term loan management has already leaded an enormous volume of outstanding loan in our country. At this backdrop, in order to ensure flow of term loans and to meet the credit gap, NBFIs have immense importance in the economy. In addition, non-bank financial sector is important to increase the mobilization of term savings and for the sake of providing support services to the capital market. The focus of this paper is to highlight the necessity and importance of NBFIs to strengthen the financial system for rapid economic development of the country.

Building a sound financial system is an immense necessity for the economic development of a country. The main task of the financial system is to mobilize funds from the surplus budget unit to deficit budget unit. Financial system provides a strong mechanism for collection and allocation of financial resources among the various alternatives. However, in a developing Country like Bangladesh it is very hard to reach in a sound financial system due to the lack of requisite institutions, expertise and resources. Many legal and regulatory frameworks are needed to ensure discipline in the financial system. For these reasons, careful assessment of the financial system is necessary to determine about which features of the financial system are basic and which features are secondary and the types of institutions that are essential in the process.

Actually, financial system is decomposed of into two basic types of institutions. One is the banking financial institutions (BFIs) and the other is the non-banking financial institutions (NBFIs). These two financial institutions are different in respect of their activities and treatment of the assets and liabilities in the financial market. For a well functioning financial market along with the BFIs, NBFIs have an important role to uplift the economic activity. These two financial sectors can simultaneously build up and strengthen the financial system of the country.

This paper analyses the importance and roles of NBFIs in developing economy of Bangladesh. Our study is confined to 25 NBFIs who got license from Bangladesh Bank up to 2001 under the Financial Institution Act-1993 and Financial Institutions regulations –1994. The NBFIs sector in Bangladesh consisting primarily of the development financial institutions, leasing and investment companies, insurance industries, and the corporate debt market account for only around 4% of the financial system. Development of the NBFIs in a sustainable basis contributes to the speed and efficiency of the financial system.

The necessity for the development of NBFIs could be best judged with the following issues.

Firstly, the NBFIs are markedly different from the banking institutions and with different phenomena. These two kinds of financial institutions are complementary rather than substitute organs in the financial system. Existence of banking and non banking financial institutions, money market and capital market keep the financial sector complete and enhance the overall growth of the economy. Secondly, there is a maturity mismatch in the sources and uses of funds in our financial system, which leads inefficiency in the financial system. Commercial banks by their definition are unsuited for long term lending. Inefficiency of BFIs in long-term loan management has already leaded an enormous volume of outstanding loan in our economy.

However, with the present status, expertise and efficiency, the NCBs are barely able to serve the future investment demand of the country. Private commercial banks are less experienced and less equipped in this regard and they would not take the load or be able to take future challenges of term lending of the country. At this backdrop, in order to ensure flow of term loans and to meet the credit gap, development of NBFIs is a compelling necessity for the economy. Thirdly, sophisticated and well-developed capital market is considered as the hallmark for a market economy worldwide. Although our country is moving toward a full market based economy, capital markets are still in infancy. This is due to lack of requisite institutions those are needed in the system. In the last twenty years there has been a tremendous growth worldwide of non-bank financial institutions to provide support services to the capital market. These range from broker dealer to investment banker. The health of the capital market is largely relied upon the health of the banking and non-banking financial institutions. The key players are the non-bank financial institutions in the development of the capital market.

Although NBFIs have immense necessity and greater importance in the financial system of Bangladesh, they are severely suffering from some problems including the fund problem in terms of both availability and cost. Initiatives from all concerns are necessary to eradicate the fund constraints to ensure easy flow of fund. The existing regulatory and legal frameworks for NBFIs are not adequate in a greater extent as compared to BFIs. In some cases the types of regulation for the NBFIs are analogous with the BFIs that create some problems. It should be framed separately for NBFIs in terms of deposit and non-deposit takers and on the basis of their activities. Again, judicial and legal reforms are also necessary to build up such organizations.

However, Bangladesh Bank has taken several initiatives in recent years to improve the suitability of the regulatory framework.

Another important feature is that deposit mobilization and credit participation by NBFIs are nottaken into account while formulating the monetary and credit policy of the country. The term deposits mobilized by the NBFIs are not yet included in the money supply of the country which have eventually impact on the monetary policy.

The focus of this paper is to highlight the necessity and importance of NBFIs along with BFIs to strengthen the financial system of overall economic development of the country. We also put insight into the problems and future prospects of NBFIs. Earlier Saha et al. (1999) and

Chowdhury (1999) analyzed and highlighted problems and prospects of NBFIs on the basis of the performances of 18 NBFIs up to 1997. The problems those were highlighted by the authors are still prevailing. The growth of NBFIs in terms of assets and liabilities and diversified areas of Business has significantly increased within this short period of time after inception. In this paper an attempt has been made to highlight different features of NBFIs to identify their importance in financial system of Bangladesh. Special emphasis has been given to the complementary role of NBFIs with BFIs for efficiency of financial system, contribution in term lending with special discussion on leasing, role in capital market development, problems in availability of fund, impact of NBFIs’ Deposit Mobilization on the Monetary Policy etc. However, other aspects like product innovation, development pace, new area of venture, initiatives taken by government and Bangladesh Bank for the development of NBFIs, and comparison with world situation have been discussed in different places

.These issues are mainly concerned with the development of NBFIs as well as their role in strengthening financial system of Bangladesh.

This paper studies the activities of the NBFIs on the basis of the secondary data obtained from different sources like NBFIs, Bangladesh Bank, World Bank, Ministry of Finance, daily news papers, etc. We have faced difficulties in analyzing data due to inconsistency and insufficiency. The periodical publications of different NBFIs are not complete and also they do not follow unique system of data reporting.

Bank vs. Leasing (Non Bank Finance)- Conceptual Debate

The banking financial institutions particularly jeopardize economy of Bangladesh. The banking financial system in Bangladesh comprises of 4 nationalized commercial banks (NCBs), 29 private local commercial banks, 13 foreign commercial banks, and 5 nationalized specialized banks with a total of 6156 branches (BB, 2002). Adjacent to the present free market economy and globalization concept, privatization of banking sector is getting preference, and performance and confidence of private banks are increasing day by day. The four NCBs control 52.7 percent of total bank deposit on June, 2001 from 54.5 percent at the end of the previous year and accounted for 45.5 percent of total bank credit at the end of 2000/2001 from 47.6 percent of the previous financial year (BB, 2002, p.33). However, a substantial portion of loans is non- performing. Given the situation, Bangladesh economy particularly is passing a transitional + period to restructure the financial sector. The overall scenario is that private banking financial Institutions (PBFIs) are likely to emerge slowly to capture the market shares of the NCBs.

However, a quick and complete restructuring is needed to get the benefits of the market-based economy. The state-owned baking sector is compelled to follow the government directions strictly in doing their business as well as is acting as a source of government’s deficit financing.

On the other hand, PBFIs are being confined with short-term finance because of the fear that the loan will be bad. In this situation, some unsolved questions arise in this area that include how much the economy should rely on bank versus non-bank financing (leasing)?

In a conference on “Building Sound Finance in Emerging Market Economies” held at IMF headquarter in Washington D.C on June 10-11, 1993, a group of participants viewed that bank lending would be unprofitable and misguided in the transitional (Caprio et.al. 1994) period because of the risk of the environment and absence of skilled manpower. They also argued that development of the capital market would get preference if privatization were thought as the key part of the economic development. The participants also added fuel to the debate by proposing a technologically sophisticated and expensive payment network to facilitate the non-bank finance.

However, anyone can envisage the need of both bank and non-bank financial institutions for economic development. Banks are the principal sources of working capital and provide highly liquid investment in which firms’ can stone receipts. On the other hand, NBF sector is necessary to increase the mobilization of term savings and enhance availability of equity and term finance for the private sector as well as support services for the capital market. Bank funds provide liquidity, which ultimately facilitate trade in commodities and in financial assets. Moreover banks act as the lender of the first resort of other financial institutions, which ensures its importance in the financial system.

In recent years, the dominance of banks as financial intermediaries in some developed countries has been reduced somewhat with the emergence of the non bank financial intermediaries and with the development of the corporate debt market that gives firms direct access to individual savings. Development of the government securities promotes the development of the money market. Secondary market for equity maximizes the wealth of the capitalist system and individuals demand for liquidity satisfied. Given this situation the matter is that with the banks, how far the non banks could simultaneously build up to bring the efficiency of the financial system.

The history of the economic development of different countries of the world suggests that financial development of the country start from banking financial institutions followed by the non banking financial institutions. But in the later stage, the contribution of non-banking financial institutions becomes more eminent than the BFIs. Actually both types of institutions are needed and competitions within and between banks and non-banks could enhance economic development and improve their expertise.

Monitoring of the Non-bank Financial Institutions (Leasing)

Bangladesh Bank is empowered to oversee and regulate the affairs of the NBFIs under the provisions of the Financial Institutions Act 1993 and the Financial Institutions Rules 1994. To improve the quality of financial intermediation and meet up the growing needs of funds for financing investments in different sectors of the economy, the government intends to intensify the financial market by granting permission to establish private NBFIs in conjunction with the private commercial banks. At present, non-bank financial sector of the country comprises Investment and Finance Companies, Merchant Bankers, Leasing Companies, Mortgage Banks, Insurance Companies, and the Capital Market. Although small, the NBFI sector in Bangladesh is a growing component of the entire financial sector and NBFIs

The Phenomenon of Long Term Financing and the Analysis of Leasing Performance inTerm Financing

One important arena of leasing is the deployment of funds in the long term financing. By definition, banking financial institutions should not involve in the long term financing and they are the institutions related to the money market instruments and allowed to make only fully collateral short term lending. Bank business is based on the depositors’ money. Lending long is risky because it creates least accountability to the borrowers. Borrowing short and lending long by the BFIs create a mismatch in the financial system and hamper the macroeconomic stability.

Time lag between lending and borrowing of the commercial banks has leaded a maturity mismatch as there is about 10 months average maturity gap between the deposit fund and loan portfolio (BB, FID). Again the interest rate charged by banks does not cover the total cost of funds. Before 1990, there was direct monetary control and the central bank administered the interest rate for both deposit and credit. After that although interest rates were not controlled by the central bank, commercial banks did not have such professionally –expert personnel to assess the lending risk. Banking sector in Bangladesh felt a lack of basic expertise, which was needed for the market-oriented approaches. In the same way performance of the two public Development Financial Institutions (DFIs) namely BSB and BSRS are very unsatisfactory as their non-performing loan is over 50% for the last several years. These issues demanded for a sustainable basis for long term financing which is a major part of the leasing business by nature.

However, in Bangladesh, the BFIs are still the principal sources of long term financing, accounted to about 70-80% term loan disbursement (BB, FID). Before 80s, there was no alternative mode of long term lending other than the BFIs. So BFIs were in a tremendous pressure to provide long term financing for industrialization of the country. After 80s, there was consensus among the government policymakers and international bodies to search an alternative source. Subsequently, leasing has started to emerge in the financial system of Bangladesh.

Term Financing by Leasing

Term loan provided by the financial system of Bangladesh is about US$ 250-300 million per year, equivalent to around 1.5% of our GDP, while the public and private investment amounts to about 16% of GDP (FIDP working paper, 1999). Without smooth long term lending system, industrial development of the country is not possible. Analysis of the operational activities of the NBFIs shows that many of them have strong participation in lease financing. However, though leasing is considered as an alternative mode of long term lending, leasing contribution to total long term financing is still very small in amount. As on December 31, 2001 total financing of 25 licensed NBFIs stood Tk. 2,1240.7 million (NBFIs-FRs). According to the statistics of BB, 2.85 percent of the outstanding amounts of loans//leases were found classified as bad debt as on June 30, 2001 (BB, 2002)

NBFIs Performance in Leasing

We discuss NBFIs performance in leasing specially in this section because of its some imposing features though leasing are analyzed under the head of long term financing in this paper for many times. One important feature is that the leasing industries in Bangladesh have grown significantly within the last 10 years. Competition among the leasing industries has been intensified and this competition in leasing business does not come only from the NBFIs but also from BFIs. Many commercial banks and other financial institutions like ICB (Investment Corporation of Bangladesh) are participating in the leasing business. The commercial banks are doing lease business as EZARA under Section 7 DA (4) of the Bank Companies Act 1991. Commercial banks are also taking advantage of their low costs of fund than the leasing companies. In this situation, leasing companies have an argument that if banks are allowed to do lease business, so they should be permitted to do banking in a limited scale. This type of agreement may not be considered as good because it would create difficulties in the smooth functioning of these two sectors.

Product diversification

The imposing picture of the lease industry in Bangladesh over a short period of time built up the confidence that it could grow with our expected level. Leasing should not be confined with some selected sectors. It should come with a view to financing small and medium scale enterprises, especially taking into considerations into the manufacturing enterprises, forward and backward linkage industries etc. The leasing companies have a changing role with the liberalization of capital and money market, with a vision to increase investment and production of the economy.

However, leasing companies in Bangladesh are confined with the less risky investment. Leasing should be expanded to more risky and higher return investment like venture capital, energy resource etc. In Japan, leasing in computers and office machinery captures more than two third of the market. In Bangladesh, leasing companies can come forward to expand the IT sector, and thereby can play a significant role in the development of the economy.

Development of the Capital Market and the NBFIs

The essence of a market based financial system is the well-organized and efficient capital market. The stock market is the first and foremost forum in which individuals can trade risk and return, firms can raise capital and stockholders can maximize the value of their shares. At present, the worldwide capital market provides an excellent mechanism for mobilizing savings for industrialization. Through the efficient pricing of the shares in the market, the wealth of the company is maximized and individuals get prize for their sacrifice of present consumption. On the other hand, primary market gives the opportunity to the firms to generate capital from the public and also provides individuals participation in the firms’ ownership. The development of the secondary market for equity does not contradict with the development of the banking sector.

In many countries of the world especially the countries of the continental Europe and Japan have started their reforms based on bank-dominated system first. So a full pledged reform program of financial sector includes the development of both bank and non-bank finical institutions in the financial system so that the overall savings and investment activities improve significantly.

Non-bank financial institutions are permitted to work as merchant banker. In this situation, they have to take a separate license from the Securities and Exchange Commissions (SEC). Merchant banking activities involves activities like a manager of the issue, underwriter, bridge financer and portfolio manager etc. NBFIs can venture in such types of risky businesses because of their particular types of sources of fund, which facilitate them to provide institutional support to the capital market. On the other hand, bank’s money is the depositors money and so that they go for less risky short term financing. For this reason banks are subject to high regulations and NBFIs are little or no regulations around the world and thereby can go easily for risky investment such as merchant banking, venture capital etc. NBFIs are not permitted to use ‘bank’ in their names and use companies. Their funding is not covered by the government protection. These distinct natures make the NBFIs separate from the BFIs and place a separate arena in the financial market place.

However, one may argue for the commercial banks involvement in the capital market as it follows the universal banking system, such as that of many continental European countries, Germany in particular. In the universal banking system, banks provide both commercial and investment banking services. The principal arguments are to lend from the equity and to provide economics of scale to the banking companies. But according to the some economists, the model might be practically inappropriate. Kundleberger, Blommestein Spencer, Sleeinhere, Huvencer and Muldure are few of them. The weaknesses identified by them are first, it gives significant equity stake to the commercial bank and reach a certain proportion without approval from the central bank. Secondly, commercial banks feel lack of expertise and experience to assess the potential risk and return of the investment in the market. Commercial banking activities are less risky than the security operation and risky security business may affect the commercial banking activities. Again Muldure (1992) got no evidence of economies of scale in the universal banking.

(Caprio et al. 1994).

So, capital market development needs the simultaneous development of associate institutions like NBFIs. NBFIs capture the second position in the world capital market in volume in the early 90s. NBFIs activities in this market involves investment and merchant banking, including the portfolio management, issue managing, underwriting and bridge financing, consultancy or advisory services, selling of financial data, corporate agents in merger and acquisition, investment counseling et. NBFIs are required to take a separate licensee from the SEC to do the activities related to the capital market. In our country, 7 NBFIs have got license from the SEC to do business. Among them, SABINCO is the largest portfolio investor and PFIL holds 46 investors accounts, the highest among all the merchant bankers working in the market. The NBFIs those are working as merchant banks are also working as issue manager or underwriter of the issue. A careful analysis of the activities of 27 merchant bankers reveals that NBFIs are now in the leading position among the merchant banks.

Sources of Fund and FIDP

The prime sources of leasing are loan from the other commercial banks, term deposits from the public, and fund from capital market by issuing shares, debentures, bonds etc. and loan facilities from the international agencies like ADB, IDA, IFC etc. As on December 31,2001, 11 leasing have found to hold the lease deposit with a total amount of TK. 710.030 million (BB, FID). Due to various reasons, the deposit collection of the leasing is not satisfactory and it holds insignificant portion of the country’s total deposit.

Leasing is facing some difficulties in raising their fund. They have to collect fund from the credit lines of the commercial banks at a very high rate of interest ranging up to 15%. Moreover, they have to provide high and expensive collateral securities like fixed deposits, and insurance guarantees etc to borrow fund from the commercial banks. Rising of fund from capital market has become a distant possibility due to absence of an efficient capital market in the country.

Moreover, the capital market in Bangladesh is yet to recover from the market crush of 1996 and there is lack of sufficient investors’ participation till now. Again, it is also high risky for taking long-term foreign currency loan because of exchange rate fluctuations and lack of absorptions scheme against fluctuation.

International Development Agency (IDA) prepared a long-term credit line under its Financial

Institutions Development Project (FIDP) to the Government of Bangladesh (GoB). IDA funding is placed at USD 46.9 million. An important objective of this project is to develop the capability of the financial intuitions to raise medium/long-term resources. The project has established Credit, Bridge, and Standby Facility (CBSF) to implement the financing program for private sector enterprises through financial institution. Bangladesh Bank is acting as the administrator of the FIDP/CBSF. The GoB has provided co-financing for the project an amount of US$5.00 million, US$3.00 million of which is earmarked for the credit component and US$ 2.00 million for liquidity mechanism. The FIDP has already started working since early 2000 and it is hoped that it will help raising medium/long resources for leasing.

Bangladesh Bank has taken several steps to reduce the costs of the leasing. The Statutory Liquidity Ratio (SLR) of the financial institutions was reduced from 10.0 percent to 5.0 percent, of which 2.5 percent was to be kept as Cash Reserve Requirement (CRR) with the Bangladesh Bank and remaining 2.5 percent would be kept in cash or other liquid assets. Leasing that do not accept term deposits are required only to maintain the SLR at the rate of 2.5 percent (BB, 2002).

Impact of leasing ’ Deposit Mobilization on the Monetary Policy

Every year monetary and credit policy is formulated with a view to attaining some definite objectives. One of our observations is that leasing deposit and credit have not yet been accounted in the money supply. So the money supply was underestimated. In the same way, there is no account of the overall credit participation by leasing. Leasing credit and deposit are increasing day by day and they should have to be accounted for effective monetary and credit management of the country

Marketing Implication.

To be successful, the company must do a better job than competitors of satisfying target consumers. Thus marketing strategy must be geared to the needs of consumers but also to the strategies of the competitors. The competitive marketing strategy a company adopts depends on its industry position.

There is lack of marketing activities in the non banking financial sector like leasing. Service is the products and interest rate is the price of the leasing company. Here the implication of marketing strategy largely depends on the public relation.

Recommendation

The performance of the NBFIs in leasing business suggests that the industry can be growing up in a sustainable basis.

Leasing has to be equipped with highly professional personnel and technological advancement to chase the future opportunities and competition as well.

Strong institutional support is necessary for the development of capital market which is the core of economic development in the market economic system. So NBFIs should concentrate more on their activities in the capital market.

For rapid growth and development of this sector, fund problem should be solved on a priority basis.

Opening of a refinancing window even for a limited period of time may be considered after a strategic evaluation.

It is recommended that government and the central bank will take initiatives to ease the fund constraint of leasing so that they can minimize their cost of fund and to bring their cost of fund at a market level.

The regulatory framework will definitely improve and promote the activities of NBFIs, but the procedure is always subject to improvement with the diversification of products of NBFIs.

The NBFIs should publish their annual report following a unique system. It is good that BB have simplified the rules and procedures for submission of returns to BB. It is recommended that BB should include analysis of NBFIs sector in details in their periodical publications.

NBFIs deposit and credit should be accounted in the money supply for effective monetary and credit management.

Further research on the significance of their contribution in the economy is required.

Concluding Remarks

Emergence of NBFIs such as leasing has created a new avenue in our bank dominance traditional financial system. Traditionally banks are doing such businesses that they are not supposed to do. Long term lending of banks is mostly unfamiliar product for them, and has created a serious distortion in the financial market. Rather than gaining any benefit from such types of activities, the society is now carrying the load of overwhelming default loans. As leasing is considered as an alternative of long term financing many NBFIs have strong performance in leasing business. The performance of the NBFIs in leasing business suggests that the industry can be growing up in a sustainable basis. But leasing must not be confined with selected sectors. NBFIs have to be equipped with highly professional personnel and technological advancement to chase the future opportunities and competition as well.

Strong institutional support is necessary for the development of capital market which is the core of economic development in the market economic system. NBFIs around the world provide institutions support to the capital market. In Bangladesh, only 7 NBFIs are registered with the SEC and their activities in the capital market are very limited. So NBFIs should concentrate more on their activities in the capital market.

Leasing is suffering from high cost and scarcity of funds. At present, with high cost of fund non-banks are forced to compete with the banks those have relatively low cost of fund. This situation somewhat hampers the growth and development of leasing. For rapid growth and development of this sector, fund problem should be solved on a priority basis. Opening of a refinancing window even for a limited period of time may be considered after a strategic evaluation. Banking has the multifaceted own activities so that for bringing more efficiency in their own efficiency as well as the efficiency of the financial system they should not be involved with the activities that the leasing can do. It is recommended that government and the central bank will take initiatives to ease the fund constraint of leasing so that they can minimize their cost of fund and to bring their cost of fund at a market level. Leasing from their part shall be much more attentive in rigorous project analysis to perform the loans well.

A modern and dynamic regulatory framework is required for the rapid and effective development of NBFIs. The NBFIs are now regulated by the Fiancial Institutions Act 1993 and Financial Institutions Regulations 1994. Some weaknesses of these regulations have been identified. NBFI regulations should be the classification into deposit and non-deposit takers. Those NBFIs’ activities are involved with the capital market that is those obtain funds through public offering of securities should be under the regulatory jurisdiction of the Security and Exchange Commission. Bangladesh Bank has formulated and declared policies for classifying and provisioning of investment resources of NBFIs in June 2000. The classification rule has been formulated with a view to judging quality of investment funds, strengthening discipline in lending and recovery, securing peoples’ deposit, having provisions for the loss of unrecoverable invested funds and imposing interest against bad investment. This classification procedure will definitely improve and promote the activities of NBFIs, but the procedure is always subject to improvement with the diversification of products of NBFIs.

Government of Bangladesh has already taken some important steps to patronize the sector including allowance and pension and insurance fund to invest in the capital market, reduction of stamp duties and taxes of issuing cost of bonds and imposition of 10% tax on interest income arising from national savings certificate. Government has already initiated to build a secondary bond market with IMF assistance. It will be better for NBF sector if the secondary bond market could be established on an urgent basis.

The NBFIs should publish their annual report following a unique system. It is good that BB have simplified the rules and procedures for submission of returns to BB. It is recommended that BB should include analysis of NBFIs sector in details in their periodical publications. In this way, accountability on the activities of NBFIs can be established with more efficiency to the stakeholders. NBFIs deposit and credit should be accounted in the money supply for effective monetary and credit management. In sum, this paper mainly discusses and highlights some important aspects and areas of NBF sector of Bangladesh that could receive much attention from policymakers. There are many problems in the development process of NBFIs and consequently strengthening the financial system of Bangladesh. It is now well established that NBFIs can contribute much in strengthening the financial system as well as in the process of economic development of the country. Since inception in 1986, NBFIs are somewhat successful to draw attention of the people and establish its importance in the financial sector as well as in the economy of Bangladesh. It is hoped that in future NBFIs would be able to play more significant role in the development of economy of Bangladesh. Further research on the significance of their contribution in the economy is required.